WASHINGTON — The digital currency industry reacted warily to a model framework for regulating such firms released Tuesday by the Conference of State Bank Supervisors, arguing the language is too vague and treats digital assets like normal money.
The framework, which follows a draft proposal released last year, is intended to be a template for other states to use as they consider regulating virtual currency.
"The idea of the model framework is it is a tool and a resource for states who are confronting questions around the activities and licensing and regulatory status of virtual currency companies," said Margaret Liu, senior vice president and deputy general counsel at the CSBS. "As a general matter, the approach is to look at the activities so you would apply the activity to the facts of any entities business model and make an evaluation."
But some in the industry felt that while the CSBS' intentions are good, the final language misses the mark.
"The CSBS has always had the right policy in mind for digital currencies," Peter Van Valkenburgh, Coin Center Director of Research, said in a statement. But "we have strong concerns about the vagueness of the language they've chosen in this final draft."
Part of the objections stem from the number of players that would be covered under the group's framework, which would capture the transmission and exchange of virtual currency for fiat currency and the exchange of virtual currency for other digital currency.
Stakeholders expressed specific concern about a part of the framework that said "services that facilitate the third-party exchange, storage, and/or transmission of virtual currency (e.g. wallets, vaults, kiosks, merchant-acquirers, and payment processors)" should also be covered.
"This section might be reasonable were it indicative of some services that may be covered, but—instead—the language prefacing this prong is less forgiving; 'covered activities' includes 'at minimum' these mere facilitators," said Van Valkenburgh.
Erik Voorhees, chief executive of the virtual currency company ShapeShift.io, said "it seems like they are just treating all cryptocurrencies, all digital assets, as normal currency." Ultimately, that means all virtual currency companies could be treated "like a bank."
"It is really important to realize that digital assets are going to include all sorts of weird things," Voorhees said about the innovation happening in the virtual currency space. "Some of this stuff will behave like money and some of it will not."
The CSBS does list exclusions from the framework, including for rewards programs and merchants who transact goods and services with virtual currency. The framework says "activities that are not financial in nature but utilize technologies similar to those used by digital currency," are not intended to be covered. "For example, a cryptography-based distributed ledger system for nonfinancial recordkeeping would be outside the scope of this policy."
The CSBS framework also provides for the use of the Nationwide Multistate Licensing System to support the sharing of information and to aid the licensing process.
"The idea in the virtual currency space is that a system such as the NMLS would be useful both as a regulatory tool to facilitate regulators sharing information … but it is also a tool for industry to support multistate licensing," Liu said.
One of the bigger challenges virtual currency companies have faced is that money transmitters are regulated on a state-by-state basis. Not only do states have different regulatory regimes, but many have also been unable to communicate how they treat virtual currency businesses.
"We are very appreciative of the CSBS' efforts to coordinate a cohesive view among the states for the regulation of virtual currency," said Perianne Boring, president of the Chamber of Digital Commerce. But she warned "the devil will be in the details."
Liu also emphasized that the framework was a tool that states can build off of and that "it is still ultimately a decision that is governed by the laws of each state" on how they regulate virtual currency.
The virtual currency industry has also advocated for a conditional or transitional license for start-ups as an "on ramp" as they get their feet off the ground, but the framework is silent on the issue, deciding to reserve judgment on the issue.
Voorhees warned that the framework could ultimately let other countries take the lead in digital currency.
"The industry is global so it won't affect the industry globally, but it will affect the industry in the U.S.," he said. "If this gets adopted in the U.S., the industry is going to look just like the banking system."